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May 29, 2017

New Defination of Startup-Some Points to Know

The Government of India had announced 'Startup India' initiative for creating a conducive environment for startups in India. The various Ministries of the Government of India have initiated a number of activities for such purpose.

The Government had received representations from various industries seeking changes in the definition of a startup. DIPP has now issued new notification to bring about changes in the definition of startup. The list of major changes is as follows:

(1) Enlarged definition of Startup:

Earlier an entity would be considered as Startup if it was working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

In order to grow the employment opportunities for youth, the DIPP has now enlarged the definition of startup. Now, entities having scalable business mode with a high potential of employment generation can also apply for registering as a Startup. This will allow registration of more startups and will definitely create more employment opportunities for the youth.

(2) Extending startup period from 5 years to 7 years:

Earlier an entity was considered as startup upto 5 years from the date of its incorporation. Accordingly, tax exemption under Section 80-IAC was allowed for any 3 consecutive years out of first 5 years of its incorporation as Start-up.

Now, the Finance Act, 2017 has extended the period for claiming tax deduction so that startups can claim tax emption for three years out of first 7 years.

To align the provisions of the Income-Tax Act with the definition of startup the definition of latter one has been amended. Now entities would be considered as startups for first 7 years instead of 5 years.

However, in case of Startups engaged in the biotechnology sector, this period will be increased to 10 years. It may be noted such Startups cannot claim tax exemption after 7 years of their registration.

New Defination of Startup-Some Points to Know

(3) Partnership firms not eligible for tax benefits:

Earlier tax holiday would be available for eligible startups registered as Private Limited Companies, Partnership Firms or Limited Liability Partnerships (LLP's). Now Govt. has denied benefit of tax holidays to Partnership firms.

(4) Restructuring process of recognition as a 'Startup'

Earlier entities were required to furnish many documents for registration as startup, like letter of funding by angel fund, recommendation letter, etc. The process of registration process as startup has been simplified. Now entities would be required to submit certification of incorporation and other docs as may be sought for registration as a startup.